Too High to Buy? Swing Trading and Sitting on the Sidelines
Stocks rallied on one of the most bullish days in market history, responding with rare strength to the oversold conditions that characterized the end of last week.
What a difference a day makes — especially when that day features a rally of more than 11% in the Dow industrials, S&P 500 and Nasdaq Composite.
Depending on your perspective, that’s the good news. And I would not be surprised if we saw follow-through on Tuesday, particularly as the market absorbs the Treasury’s new plan to partially, temporarily, nationalize the banking system with direct infusions of capital to banks such as Bank of America, Citigroup and Goldman Sachs in exchange for equity stakes.
However, we cannot lose track of the fact that the major indicies — the Dow industrials, the S&P 500 and the Nasdaq — are all still trading below their 200-day moving averages and, after Monday’s massive rally, are all now overbought — or close to it.
There have been many lessons in this now year-long bear market. And one of those lessons is that overbought markets below the 200-day moving average are not markets that traders should be buying into with gusto.
Yes, sooner or later the markets trading below the 200-day moving average will become overbought and stay overbought long enough for those markets to close above the 200-day moving average and stay above the 200-day moving average as they pull back. That will likely be the clearest signal that the bear market — on an intermediate basis or better — is over.
But until then, rallies are a time for profit-taking, not “new position making.†As we see in the shift in our Top 25 PowerRatings stocks from an abundance of 9s and 10s to mostly 8s and a few scattered 9-rated stocks, the market is telling us that the time for buying stocks once again a correction or two away.
As such, I’m not going to provide any new stocks for today. Of the Top 25, 24 stocks have Short Term PowerRatings of 8. But all 24 are trading below their 200-day moving averages. This is not a market — Monday’s buying frenzy notwithstanding — in which we want to make a habit of buying stocks that are trading below their 200-day moving averages. Avoiding that temptation has been a hallmark of what has kept us profitable for the past few years — especially 2008 — and we are not about to change our game now.
Good luck and good trading. We will wait for the markets to settle down a bit, and see what opportunities appear at that point.
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